Corporation tax in Northern Ireland

For some years it has been argued that the Republic of Ireland has had greater success in attracting foreign direct investment due, in part, to its relatively low rate of corporation tax, and that Northern Ireland has suffered from this tax competition. In his 2011 Budget the then Chancellor, George Osborne, announced a Treasury review to “consider the case for Northern Ireland having a lower rate of corporation tax than the rest of the UK … to deal with the unique issues posed by the Irish Republic’s business tax regime.”[1] However, it was not until his Autumn Statement in December 2014 that the Chancellor announced that the Government would take this forward, “provided that the Northern Ireland Executive can show that they are able to manage the financial implications.”[2]

On 7 January 2015 the then Secretary of State for Northern Ireland, Theresa Villiers, made a statement on the Stormont House Agreement, concluded by political leaders in Northern Ireland on 23 December 2014.[3] One aspect of the Agreement was the UK Government’s commitment that legislation would “be introduced as soon as Parliament returns to enable the devolution of corporation tax in April 2017.”[4] Ms Villiers said that this legislation would be presented to the House shortly, while its Parliamentary progress would proceed in parallel with the implementation of key measures to deliver sustainable finances for the Northern Ireland Executive.[5] The Government presented a Bill to this effect the following day, and the Corporation Tax (Northern Ireland) Act 2015 received Royal Assent on 26 March.[6] 

The Act provides for the Northern Ireland Assembly to have the power to set the main rate of corporation tax in respect of certain trading profits. The rate would apply to all of the trading profits of a company if that company was a micro, small or medium-sized enterprise, and the company’s employee time and costs fell largely in Northern Ireland. The rate would also apply to the profits of large companies attributable to a Northern Ireland trading presence. Certain trades and activities would be excluded from the scope of the rate – such as lending and investing activities. Control over the corporation tax base, including reliefs and allowances, would remain with the UK Parliament.

HM Revenue & Customs has estimated that a Northern Ireland rate would affect “34,000 companies of all sizes, including 26,500 SMEs” though “the burden will vary greatly depending on their size, existing tax arrangements, whether they have any NI based trading activity in a given year, and whether their activity is wholly based in NI.” HMRC did not publish an estimate of the potential economic impact of devolving corporation tax in this way on the grounds that the legislation “only devolves the power to set rates to the NI Assembly; it does not specify any Northern Irish CT rate.”[7]

To date the power to set a Northern Ireland rate has not been devolved, although in November 2015 the Northern Ireland Executive had publicly indicated its intention for the regime to begin in April 2018, with the rate of tax set at 12.5%. In the Autumn Statement in November 2016 the Government confirmed that it was continuing “to work closely with the Northern Ireland Executive towards the introduction of a Northern Ireland rate of Corporation Tax, subject to the Northern Ireland Executive demonstrating it has placed its finances on a sustainable footing.“[8] At this time the Government also announced some modifications to the application of the NI rate, to give all small and medium sized enterprises trading in Northern Ireland the potential to benefit;[9] provision to this effect was made by section 25 and Schedule 7 of the Finance (No.2) Act 2017.  

This paper explains the development of the Government’s policy and the wider debate over corporate tax competition, before discussing the introduction of this legislation. Recent developments as regards the implementation of the Stormont House Agreement the collapse of the Northern Ireland Executive and the continued difficulties to conclude an agreement to restore power-sharing are discussed in other Library papers.[10]   

Notes: 

[1]     HC Deb 23 March 2011 c959. Details of the Treasury review are collated on Gov.uk

[2]     HC Deb 3 December 2014 c314

[3]     For further background see, Northern Ireland: Stormont House Agreement and implementation, Commons Briefing paper CBP7284, 19 August 2015

[4]     Northern Ireland Office, Stormont House Agreement, December 2014 para 8

[5]     HC Deb 7 January 2015 cc296-7. The Bill, its Explanatory Notes and details of its Parliamentary scrutiny are on the Parliament site.

[6]     Northern Ireland Office press notice, New Bill to devolve Corporation Tax in Northern Ireland, 8 January 2015

[7]     HMRC, Corporation Tax: devolution of rate-setting power to Northern Ireland, 8 January 2015

[8]     Autumn Statement 2016, Cm 9362, November 2016 para 3.55. see also, PQHL3634, 12 December 2016

[9]     HMRC, Northern Ireland rate of Corporation Tax: changes to small and medium-sized enterprise regime – tax information & impact note, December 2016

[10]    A Fresh Start: the Stormont Agreement and Implementation Plan and the Northern Ireland (Welfare Reform) Bill 2015-16, CBP7389, 20 November 2015; Northern Ireland since May 2016: developments, CBP8231, 19 March 2018.